A borrower and a lender agree on a mortgage interest rate.If inflation turns out to be less than expected
A) the actual real interest rate will exceed the expected real interest rate.
B) the actual real interest rate will be less than the expected real interest rate.
C) the actual nominal interest rate will be higher than expected.
D) the actual nominal interest rate will be less than expected.

Question

Quizplus · Accepted Answer

When inflation is less than expected, the actual purchasing power of the interest payments increases, meaning the real interest rate is higher than initially anticipated. The nominal interest rate, agreed upon at the outset, does not change with inflation expectations.

A Borrower and a Lender Agree on a Mortgage Interest